“City” job losses lower prime residential rents

The key drivers for the recent weaker residential rental performance in central London are: City of London job losses and, ultimately, affordability for tenants.

Liam Bailey, head of Residential Research at Knight Frank comments: “Rental falls in winter are not uncommon, the employment market is quieter and less people are typically looking to move to new positions.

“However there are signs that the weakness in the City of London jobs market, where new employment vacancies are down 51% year-on-year at the current time (according to Morgan McKinley), is beginning to feed through to the rental sector.

“With the banking sector expected to deliver much lower bonuses in the first quarter of 2012 compared to last year, tenants who are building deposits for eventual entry to the housing market are looking to reduce their rental costs in the interim.

“Additionally rental budgets for corporate tenants, employees who have been relocated to London by their firms, have been cut back by anything up to 15% over the past 12 months.

“The other main driver helping to push rents lower is affordability. Tenants saw rents rise 27% in the two years to September 2011 – hitting all-time highs at that point. At best, disposable income even in central London, only rose by around 8% over the same period – landlords are having to accept that continually rising rents are not a fixture of the market.

“In terms of sub-market performance, across central London there is a particular shortage of prospective tenants looking in the mid-market, a definition which varies depending on the area, but is typically around £800 or £1,000 to £2,000 a week.

“Activity has been strongest at the lower end of the market and to a lesser extent, the top-end. The sub-£1,000 a week bracket has seen more demand recently as people have been tightening their budgets, with both individual tenants and companies housing corporate tenants.

“The £4,000+ per week bracket has also been active, especially in Belgravia and Knightsbridge with the arrival of a number of Russian tenants at this level of the market.

“Our view looking ahead is that rents will begin to rise slightly from the spring onwards. We are not expecting significant rises from here.”